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UNILATERAL CONDUCT WORKBOOK

CHAPTER 5: EXCLUSIVE DEALING

Prepared by

Unilateral Conduct Working Group

Presented at the 12th

Annual ICN Conference Warsaw, Poland

April, 2013

ICN Unilateral Conduct Workbook

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CHAPTER 5 – Exclusive dealing

Table of contents

I. Introduction .................................................................................................... 4

II. Framework for Assessing Exclusive Dealing ............................................... 8

A. Legal Basis .............................................................................................................. 8

B. Summary of Evaluative Criteria .............................................................................. 9

Market Definition and Substantial Market Power .................................................... 10

The Existence of an Exclusive-Dealing Arrangement ............................................... 11

The Extent of Anticompetitive Effects ....................................................................... 11

Offsetting Pro-Competitive Justifications and Defenses ........................................... 13

III. Means to Create Exclusivity ........................................................................ 13

A. De Jure Exclusivity ............................................................................................... 14

B. De Facto Exclusivity ............................................................................................. 14

C. Scope of Coverage — Total and Partial ................................................................ 15

IV. Evaluating Competitive Effects ................................................................... 16

A. Foreclosure of Competition ................................................................................... 16

B. Factors relevant in assessing whether there is market foreclosure ........................ 17

Market coverage ....................................................................................................... 17

Duration of the Exclusive Dealing Arrangements .................................................... 18

Existence of Alternative Sources of Supply or Alternative Means of Access to the

Market ....................................................................................................................... 20

The level of the distribution chain at which there is exclusivity – e.g., suppliers vs.

distributors vs. end users........................................................................................... 21

Whether the Customer Requested the Exclusivity ..................................................... 21

Ease of Entry and Market Dynamics ........................................................................ 21

Scale Economies ....................................................................................................... 22

C. Evidence of competitive effects ............................................................................ 23

(i) Increase in prices ................................................................................................. 25

(ii) Reduction in Overall Output ............................................................................... 26

(iii) Increase in market share .................................................................................... 27

(iv) Exit ...................................................................................................................... 27

(v) Deterring Entry .................................................................................................... 28


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Indirect evidence of harm to competition .................................................................. 29

Sources of relevant evidence ..................................................................................... 31

V. JUSTIFICATIONS AND DEFENCES ...................................................... 32

A. Introduction ........................................................................................................... 32

B. Potential efficiencies ............................................................................................. 33

Encouraging distributors to promote a manufacturer's products more vigorously .. 33

Encouraging suppliers to help distributors by providing services or information

benefiting consumers ................................................................................................. 34

Addressing problems of free-riding between suppliers ............................................. 35

Addressing “hold-up” problems for customer-specific investments ......................... 35

Allowing suppliers to control distribution quality more easily ................................. 36

C. Assessing Efficiencies ........................................................................................... 36

Are the parties able to achieve the efficiencies through less restrictive means? ...... 37

Efficiencies against competitive harm....................................................................... 38


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I. Introduction

1. The term ―exclusive dealing‖ is generally used to describe an arrangement

through which an upstream seller‘s goods are sold to a distributor or

retailer under the condition that the distributor or retailer does not sell

similar competing products. The term exclusive dealing may also describe

an arrangement by which a downstream purchaser requires an upstream

seller not to sell its product to any competing downstream purchasers.

This Chapter focuses on the first type of exclusive dealing arrangement.

2. Exclusive dealing arrangements can take a number of forms. One

possibility is a contract between the seller and buyer that requires the

buyer to purchase all units of a particular product from the seller

(sometimes called a ―requirements contract‖). More typically, however, a

reseller agrees to sell only the product sold by the seller or a downstream

manufacturer agrees to use only the seller‘s input in goods sold

downstream. The exclusivity need not be expressly stated in a formal

agreement but may rather be the de facto result of agreements or a seller‘s

policy not to deal with a purchaser that purchases its rivals‘ products.

3. Among the practices considered in this chapter under the rubric of

―exclusive dealing arrangements‖ are those that do not contractually

require total exclusivity but have many of the same characteristics. Such

arrangements include provisions that require a distributor or retailer to

purchase a high percentage (rather than all) of its needs for a particular

good and/or provide for limited exceptions to selling only the product of

the upstream seller. For example, this may be the case with a stocking

requirement or a minimum purchase requirement.

4. In addition, exclusive dealing may be enforced through creating direct or

indirect disincentives to turn to alternative sources of supply or

distribution channels, for example if discounts are made conditional on

exclusivity, either explicitly or in effect.


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5. Competition laws may allow exclusive dealing arrangements to be

challenged under laws prohibiting anticompetitive agreements or laws

prohibiting single-firm abuse of dominance. Notwithstanding the

requirement to demonstrate dominance under abuse of dominance laws,1

for the most part, the economic and legal analysis of exclusive dealing

arrangements is similar under either type of law. 2

This workbook

considers exclusive dealing where it is a form of unilateral conduct. It

therefore deals primarily with the evaluation of exclusive dealing

arrangements under abuse of dominance or monopolization provisions in

competition law.

6. Exclusive dealing arrangements are evaluated in most jurisdictions on the

basis of actual or likely competitive effects, rather than being condemned

categorically (or ―per se‖).3 Consequently, the likely effect of an exclusive

dealing arrangement on competition should be carefully evaluated. First,

in the absence of dominance by a party to an exclusive dealing

arrangement, an exclusive dealing arrangement is less likely to affect a

sufficiently large amount of the trade in any relevant market to have an

anticompetitive effect. Indeed, in certain jurisdictions this is a reason for

limiting prohibitions on exclusive dealing arrangements to those involving

firms that hold dominant positions or substantial market power.4 Second,

even when a dominant firm is involved, the particular exclusive dealing

arrangement may not affect a large enough proportion of the relevant

distribution channels to produce an anticompetitive effect. Third,

1 This may in practice lead to a higher threshold of intervention than for laws relating to

vertical agreements 2 Some courts in the United States have found that different statutory provisions create

different standards of legality. See, e.g., United States v. Dentsply Int’l, Inc., 399 F.3d 181,

197 (3d Cir. 2005). Likewise, the EU rules for Article 101, eg, the Block Exemption

Regulation, tend to apply lower market share thresholds than under Article 102. 3 ICN Exclusive Dealing Report, at 5, available at

http://www.internationalcompetitionnetwork.org/uploads/library/doc355.pdf 4 For specific guidance on the assessment of “dominance,” see Chapter 3 of the

Workbook, available at:

www.internationalcompetitionnetwork.org/uploads/library/doc752.pdf.

http://www.internationalcompetitionnetwork.org/uploads/library/doc355.pdf

http://www.internationalcompetitionnetwork.org/uploads/library/doc752.pdf


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exclusive dealing arrangements can be efficient and beneficial to

consumers.

7. Exclusive dealing arrangements can promote efficiency and benefit

consumers because suppliers and their distributors or retailers are in a

vertical relationship and perform complementary functions in serving

downstream customers. Thus, they may be thought of as a ―team,‖ which

may act most effectively when neither member of the team has divided

loyalties or incentives to act in support of a rival team. Indeed, exclusivity

may stimulate distributors to concentrate their efforts on promoting the

supplier‘s products, thus increasing interbrand competition. In some

industries, the most efficient and most effective distribution arrangement

may be to have suppliers deal with distributors on an exclusive basis.

8. Among the collective activities these vertically aligned teams may engage

in are promotions, marketing, pre-sale customer service, and expansion

into new areas or products. The exclusive dealing arrangement can be

used to ensure that both suppliers and distributors can capture the full

benefit of their collective efforts without the risk that other suppliers or

distributors will free-ride on their efforts. Such arrangements can also

prevent ―hold-up‖ problems, for example where a supplier needs to make a

relationship specific investment to sell to a particular customer. Moreover,

an exclusive arrangement may be preferable to other contractual

arrangements, such as requirements of certain levels of service, because

contracting and monitoring costs may be lower. The various ways in

which these efficiencies may arise are covered in more detail in Section

V.B of this Chapter.

9. Exclusive dealing arrangements also can promote efficiency and benefit

consumers by creating intense competition in the process of forming

teams. Suppliers may compete with each other by offering better terms to

potential distributors. In some cases competition among suppliers would

be less effective were the resulting distribution relationship non-exclusive.


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10. Exclusive dealing can, however, have anticompetitive effects, which may

occur in several different ways. Agencies should be open to consider

different theories of harm on their individual merits. Two ways more

commonly considered are raising the costs of rivals either by foreclosing

specific distribution channels or through preventing rivals from operating

at an efficient scale.

11. Under the first mechanism, exclusive dealing may prevent rivals of the

dominant firm from serving particular customers in a relevant market

through a preferable (typically more efficient or lower cost) distribution

channel. Alternatively it may make it difficult for rivals to obtain an

important input. This in turn is likely to induce the rival to charge a higher

price than it otherwise would. In addition, preventing consumers from

having access to certain goods or services may create harm to consumers.

12. A second mechanism through which exclusive dealing may harm

competition is by causing rivals to operate at a lower output that prevents

them from operating on an efficient scale. Thus, exclusive dealing may

make it more difficult for a dominant firm‘s competitors to cover their

fixed costs of operation and operate profitably. That is, they will either

need to charge a higher price to remain profitable or, if they charge a

comparable price to the dominant firm, they may not be profitable in the

long run.

13. Any exclusive dealing arrangement inherently ―forecloses‖ rival suppliers

from particular distribution channels or outlets to at least some degree, in

that some channels or outlets are made unavailable. This foreclosure,

however, need not have anticompetitive consequences when the rivals still

have adequate access to other distributors or retailers. Therefore, in order

to likely harm competition, the degree of foreclosure must be sufficiently

great. Harm can occur because the exclusive dealing leads to exit of an

existing competitor (or prevents entry by a new rival) or through increases

in prices or decreases in innovation. Foreclosure may also harm

competition by relaxing the competitive constraint imposed by rivals


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without fully eliminating them from the market. That is, it may weaken the

ability of competitors to charge as low a price as they might otherwise do.

Moreover, potential entrants, not just incumbent competitors, may be

among the affected rivals.

14. When the degree of foreclosure is slight, significant anticompetitive

effects are likely to be absent. For example, if downstream customers

subject to the exclusive dealing account for a small fraction of total market

sales, the supplier‘s rivals in general are unlikely to suffer any competitive

handicap.5 Hence, the extent of foreclosure often is the first issue

addressed in an exclusive dealing investigation. More generally, the

specific facts of each industry, and each exclusive dealing arrangement,

are important in determining the effects on competition and consumers.

Identifying the evidence relevant to determining whether the foreclosure

likely harms competition is explained in Section IV of this chapter.

II. Framework for Assessing Exclusive Dealing

A. Legal Basis

15. Competition regimes typically deal with exclusive dealing under one of

two approaches, or a combination of the two. Under the first approach,

exclusive dealing can be addressed under abuse of

dominance/monopolization provisions in antitrust laws.6 These laws

require that one of the contracting parties to the exclusive dealing

arrangement has substantial market power or is dominant.7 They may not

5 Though as discussed below, there may be exceptions, such as where a dominant

undertaking applies a practice of exclusive dealing only to selected customers or input

suppliers who may be of particular importance for the entry or expansion of competitors. 6 ICN Report on Single Branding/Exclusive Dealing, April 2008, p. 4. 7 As explained in the Workbook chapter on assessment of dominance, jurisdictions have

differing definitions of the concept of dominance. A recurring feature of the concept is a

high degree of market power both with respect to the level to which price can be

profitably raised and to the duration for which price can be maintained at such a level.

Dominance can also be described by a firm’s ability to behave with appreciable

independence from competitive discipline. See generally ICN Unilateral Conduct


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explicitly set out conditions for establishing the existence of

anticompetitive exclusive dealing, but may have provisions for

exclusionary conduct in general.

16. Under the second approach, exclusive dealing can be addressed under

rules relating to anticompetitive agreements, or more specifically vertical

agreements. For the most part the factors used in the analysis of exclusive

dealing are the same, although the applicable law may require different

elements (such as proof of an agreement or the degree of market power

required to be demonstrated).

17. Less typically, some jurisdictions have laws with specific provisions in

place for exclusive dealing in addition to or even independent of the

above.8

B. Summary of Evaluative Criteria

18. Exclusive dealing arrangements, like many vertical relationships, are

common and not necessarily anticompetitive. They are not condemned

categorically, but in certain contexts may harm competition. As a first

step, an agency will need to identify a theory of harm whereby exclusive

dealing arrangements have resulted in substantial foreclosure which has

harmed or is likely to harm competition. A common way in which

substantial foreclosure may be anticompetitive is if it denies to rivals

sufficient share of distribution to achieve a minimum efficient scale, thus

raising the costs of those rivals. Alternatively it may raise rivals‘ costs by

preventing them from accessing particular inputs or distributions channels.

However, these are not the only ways in which substantial foreclosure may

result in anticompetitive effects. What is important in general is for the

agency to develop a robust theory of harm that connects the exclusive

Workbook Chapter 3: Assessment of Dominance, at 2 (2011); ICN Dominance/Substantial

Market Power Analysis Pursuant to Unilateral Conduct Laws,

Recommended Practices, 1 (2008). 8 ICN Report on Single Branding/Exclusive Dealing, April 2008, p. 4.


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dealing conduct with anticompetitive effects and seeks the appropriate

evidence to support the theory.

19. In developing its theory of harm an agency may wish to consider certain

evaluative criteria, which, all else equal, would make the arrangements

more or less likely to result in harm. It will also need to consider whether

there are pro-competitive benefits to the arrangements that on balance

outweigh any anticompetitive effects.

20. The appropriate criteria may vary from market to market and situation to

situation, but their assessment is likely to include some or all of the

following steps: the existence of an exclusive dealing arrangement;

definition of the relevant market and the supplier‘s market power within

that market; the extent of anticompetitive effects from the arrangement;

and consideration of offsetting pro-competitive justifications and defenses.

This section sets these out at a high-level to present an overall framework.

The following sections of the chapter then discuss each step in more detail.

21. The steps described below need not be followed in the order they are

presented. An agency should investigate such arrangements in a way that

efficiently resolves whether the arrangements harm competition or

improve efficiency. For example, an agency may be able to easily

determine that the arrangement involves significant efficiencies or no

anticompetitive harm. Resolving particular investigations in this way

minimizes the expenditure of both the agency‘s and the target‘s resources.

Market Definition and Substantial Market Power

22. An exclusive dealing matter that is being investigated as a potential abuse

of dominance requires a finding that the firm involved is dominant, or has

substantial market power, in a relevant market, or that the firm is likely to

acquire such power through exclusive dealing. Even where exclusive

dealing arrangements are investigated as anticompetitive agreements,

where an assessment of dominance is often not formally required, a logical


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first step may still be an assessment of market power. 9

In general,

exclusive dealing is more likely to harm competition where there is market

power. Further, market power will often be of direct relevance to the

specific theory of harm whereby the exclusive dealing is alleged to have

an anticompetitive effect.

23. Market power is not explicitly considered in Section IV below as the

standards and process for analyzing market power and assessing

dominance are discussed extensively in Chapter 3: Assessment of

Dominance.

The Existence of an Exclusive-Dealing Arrangement

24. As discussed in Section III, an exclusive-dealing arrangement may come

in many forms: it may be de jure or de facto and it may be completely

exclusive or partially exclusive. Indeed, from a practical standpoint, in

many jurisdictions, the precise definition of the arrangement is less

important than whether the arrangement is, in fact, anticompetitive.

The Extent of Anticompetitive Effects

25. Determining whether the arrangement has anticompetitive effects is often

the most difficult question that an investigating agency will face.

Answering the question correctly is crucial, since challenging

arrangements without anticompetitive effects may create harm not only to

the parties to the arrangement, but to competition more generally, because

it will make parties less likely to enter pro-competitive exclusive dealing

arrangements in the future.

26. The question of whether or not an arrangement has anticompetitive effects

typically requires an agency or court to determine whether it creates

substantial foreclosure within the relevant market at issue. This

9 In addition, some laws relating to vertical agreements, such as EU law, may stipulate

market share thresholds below which agreements are presumed not to be harmful to

competition.


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determination, discussed in the first part of Section IV, typically includes

an analysis of both quantitative and qualitative factors. A common

starting point is an examination of the extent of foreclosure in a properly

defined relevant market. A typical first step to this followed by many

courts and agencies is to simply consider the proportion of the relevant

market covered by the exclusivity arrangements.

27. Other factors include, most prominently, the length of the arrangements

and the ability of the contracting parties to terminate them. For example,

exclusive dealing arrangements that operate through contractual bans on

dealing with rivals are less likely to foreclose rivals when they are short in

duration, or as a practical matter may be easily terminated by either party.

This is because competitors are able to compete for the contract at regular

intervals, or if either party can terminate the exclusive dealing arrangement

at any time, at short notice and without incurring prohibitive costs.

However, where the dominant firm in question is an unavoidable trading

partner for the other party, for instance because it owns a must have brand

or because of limited production capacity on the part of its competitors,

foreclosure may also arise even if exclusive arrangements are of a short

duration or can be terminated at short notice.

28. A court or agency may also consider whether the challenged arrangements

are with distributors or end-users. If they are with distributors, depending

upon the market in question, competitors may be able to develop new

methods to sell their products to end-users, thus diminishing the

arrangement‘s actual market impact.

29. An agency should also consider how substantial foreclosure may harm

competition and what evidence exists that this is likely to occur or has

occurred. Furthermore, understanding why the parties entered the

arrangement will add important context to the analysis and may support a

finding that anticompetitive effects have arisen. The latter part of Section

IV discusses evidence relevant to this question.


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Offsetting Pro-Competitive Justifications and Defenses

30. If a court or agency considers that an exclusive dealing arrangement harms

competition in a relevant market, it should examine possible justifications

and compare the competitive harm to any pro-competitive effects arising

from the arrangement.

31. For example, the following competitive benefits could, depending upon

the particular circumstances, justify or offset competitive harm from an

exclusive arrangement: (1) Encouraging distributors to promote a

manufacturer‘s products more vigorously (2) Encouraging suppliers to

help distributors by providing services or information benefiting

consumers (3) Addressing problems of free-riding between suppliers; (4)

Addressing ―hold-up‖ problems for customer specific investments; and (5)

Allowing suppliers to control distribution quality more easily.

32. In analyzing efficiencies, the agency should consider whether they are

relationship specific, whether the parties can achieve them through less

restrictive means and whether the efficiencies outweigh any anti-

competitive effects on consumers.

III. Means to Create Exclusivity

33. There are different ways to create and enforce an exclusive dealing

relationship between a firm and its suppliers or customers. It may be

enforced either through explicit contractual terms or through creating

direct or indirect disincentives to turn to alternative sources of supply or

distribution channels. In particular special discounts or rebate schemes

may induce buyers to obtain all or most of their requirements from a single

supplier. A de facto exclusivity may arise not only if obtaining discounts

is conditional on the customer‘s purchasing of all or a very substantial part

of its requirements from a particular supplier, but also in cases where the

buyer is induced to deal exclusively with the supplier, because it is afraid


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of negative unilateral actions such as termination of the supply agreement

or refusal to honour guarantees if competing products are used.

A. De Jure Exclusivity

34. Exclusivity is clearly established where an explicit contractual obligation

is imposed on the buyer to purchase a particular type of goods or services

only from a specific supplier. The same is the case if the buyers promise

to obtain all or most of their requirements from the dominant firm.

Regardless of the terminology used – ―exclusive purchasing‖, ―single

branding‖, ―requirements contract‖, or ―non-compete obligation‖ – the

common characteristic is that the buyer is explicitly prevented from

purchasing competing products from other suppliers.

B. De Facto Exclusivity

35. De facto exclusivity may arise if buyers have strong inducements not to

purchase from alternative sources of supply even where no specific

obligation not to do so exists. De facto exclusivity may arise from the

provision of financial or other incentives that would be withdrawn if the

buyer makes use of an alternative source of supply.

36. One way in which de facto exclusivity can arise is where a dominant

supplier adopts a policy of refusing to supply any buyer that is also

supplied by a rival supplier. De facto exclusivity may also arise from

arrangements that limit the shelf space available to rivals. For example, a

dominant ice-cream producer induced outlets to, in fact, become the

exclusive sellers of its products by including a provision in supply

agreements stipulating that the freezer cabinets which it supplied free on

loan to retail outlets could only be used for its ice cream products . This


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de facto exclusivity resulted from the fact that retailers actually did not

have the space to install more than one freezer cabinet on their premises.10

37. The existence of an exclusive dealing arrangement may also be inferred

from the volume or quantity that is specified in a supply agreement. If it

specifies that a quantity must be bought and this quantity is equivalent or

close to the customer‘s total requirements, de facto exclusivity may be

created.

38. A supplier may induce a buyer not to buy or use competing products by

creating financial incentives to concentrate its demand, for example by

providing discounts conditional on exclusivity. It may also discourage

purchases of other products by practices such as threatening to refuse to

honour guarantees if competing products are purchased by the buyer.

39. The different ways of creating de facto exclusivity may also have an

influence on the degree of potential foreclosure effects. This should be

taken into account, together with other factors, when assessing the actual

or likely competitive effects of the arrangement.

C. Scope of Coverage — Total or Partial

40. An arrangement may be deemed to be exclusive dealing even if the

arrangement does not cover the entirety of the purchases or sales of the

dominant firm‘s business partner. This is because an arrangement that

covers most but not all of the sales or requirements of a contracting partner

may still lead to substantial foreclosure of a relevant market. Even without

full exclusivity, rivals may still not be able to achieve minimum efficient

scale to effectively discipline the dominant entity engaging in the partially

exclusive contract.

10 See Commission, OJ 1998 L 246/1 ; recitals 263-270 – Van den Bergh Foods. Similarly,

providing rent-free cooling machines by a dominant bottling company for carbonated

soft drinks may induce exclusivity in cases where the customer does not have the

capacity to install other coolers for chilled beverages; cf. Coca Cola, OJ 2005 L 253/21.


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41. It is important, however, that the agency take into account the fact that the

arrangement is not fully exclusive. The agency can do so in at least two

ways: First, the quantitative economic analysis of foreclosure will itself

take the partial exclusivity into account. Second, a contract that is not fully

exclusive may be of a different nature, requiring different considerations,

than a fully exclusive contact. For example, these agreements may arise

out of incentive pricing or discounts at one or more tiers of purchase

percentages.

42. Competition issues arising from arrangements that create near-exclusive

purchasing based upon discounts or incentive pricing are complicated and

often require a unique analysis based upon the specifics of the market and

the contracts at issue. An agency with concerns relating to partially

exclusive contracts may begin its analysis with the exclusive dealing

framework of analysis, but should keep in mind that the ultimate analysis

may require a more complicated inquiry into the market structure and the

effects of the contracts. These types of arrangements may sometimes be

analyzed more appropriately under a loyalty discount framework, which

will be addressed in another chapter of the Workbook.

IV. Evaluating Competitive Effects

A. Foreclosure of Competition

43. In the competition law context, ―foreclosure‖ describes a situation in

which a firm uses one or more forms of exclusive dealing arrangements to

eliminate or impede actual or potential competitors‘ profitable access to

upstream supplies or downstream distribution channels. Such foreclosure

may have an impact on competition if it is substantial enough to make

alternative sources of supply or distribution unavailable, more expensive

or less effective.

44. A specific theory of competitive harm outlining the mechanism by which

the harm occurs is a central aspect of an exclusive dealing case. In


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supporting such a theory of harm, it is helpful to distinguish between the

evidence concerning the reach of the arrangements on the market, the

percentage of the market foreclosed by exclusive dealing arrangements

and their duration, which may predict anticompetitive harm, and the

evidence of actual anticompetitive effects.

45. The first type of evidence is to determine whether the conditions that must

be present for or are conducive to harm to occur are actually present.

Such evidence could come from independent or even official sources, such

as sectoral regulatory authorities. Additionally, market shares and other

market information, facts and data gathered from the parties to the

investigation, customers and competitors could be used to establish that an

arrangement by virtue of its nature and appearance has the ability to

foreclose or has, in fact, foreclosed rivals from a substantial portion of the

relevant market. Part B discusses factors relevant to this type of evidence.

The second type of evidence relates to the anticompetitive effects

potentially resulting from foreclosure. These are discussed in part C

below.

B. Factors taken into consideration in assessing whether there is

market foreclosure

46. Listed below are factors to consider in determining an arrangement‘s

capacity to foreclose in a relevant market, and thereby result in or

contribute to anticompetitive effects. To assess the extent of market

foreclosure these factors should not be considered in isolation, but rather

considered together, taking into account of how they may interact. Not all

of the factors will necessarily be relevant in all cases. Moreover, while

they are some of the most frequently cited as being potentially relevant in

exclusive dealing cases, this list is not exhaustive of every potentially

relevant factor.

Market coverage


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47. For exclusive dealing arrangements to harm competition, they must

foreclose a substantial portion of the relevant market. The analysis of the

degree of the relevant market foreclosed considers how much of each

customer‘s requirements are subject to the exclusive dealing arrangement

in question (i.e., whether it covers all purchases or fewer than all

purchases) plus the cumulative coverage of all such exclusive dealing

arrangements in the relevant market.

48. Exclusive dealing arrangements are more likely to result in

anticompetitive effects the larger the proportion of the relevant market that

is subject to the conduct. For example, exclusive dealing arrangements

covering a large portion of the relevant market may mean that competitors

do not have sufficient means to supply their product in a cost effective

manner. Conversely, exclusive contracts affecting only a small fraction of

the relevant market may be less likely to foreclose competitors from

customers or sources of supply.

49. There is no specified degree of market coverage under which an exclusive

dealing arrangement should necessarily be deemed anticompetitive.

Having a relatively low proportion of the relevant market subject to the

exclusive dealing arrangement suggests that there may be comparable

alternative sources of supply or distribution available to competitors. This

may be a strong indication that the arrangement does not have

anticompetitive effects. However, exclusive arrangements that foreclose a

lower proportion of the total relevant market may still be anticompetitive

if they are applied to distribution channels or sources of supply that are

particularly important to potential entry by new competitors or expansion

by existing competitors. Other factors that determine this may include the

existence of alternative means of market access, barriers to entry, the

duration of the exclusive dealing arrangement, and the ability in practice

of a purchaser to cancel the arrangement.

Duration of the Exclusive Dealing Arrangements


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50. Even exclusive dealing arrangements that cover a large portion of the

relevant market may still not significantly foreclose rivals if they are for a

short duration. That is, even if the customer‘s demand is subject to an

exclusive dealing obligation, if that obligation is only for a short duration,

that demand may not be appreciably foreclosed to competition.

51. All else being equal, the longer the duration of an exclusivity obligation,

the stronger its potential for foreclosure. What is considered a ―long‖ and

―short‖ duration likely depends on the context and dynamics of the

relevant market.

52. Analysis of duration also should consider penalties for early termination of

the contract or arrangement in question. An apparently long-term

exclusive dealing arrangement may be illusory if the buyer can readily

terminate the arrangement. The factors to consider may include the time

period or notice required for termination, and whether termination triggers

financial or other economic penalties to the terminating party (and, if so,

the severity of such penalties).

53. In addition to duration, the conditions for the arrangements‘ renewal

should also be considered, such as whether they are all renewed

simultaneously and whether they are automatically renewed or subject to

conditions for renewal. Contracts with a relatively short duration but with

automatic renewal provisions effectively may have a longer term,

depending on other factors such as the penalties and procedures for

termination.

54. It is also relevant to consider the extent to which exclusive dealing

arrangements overlapp. If several exclusive dealing arrangements in a

relevant market are staggered so that only very few come up for renewal

in any given year, this may contribute to foreclosure since only a small

portion of the entire demand is contestable in any given year. This may be

particularly important where there are significant economies of scale, as if


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a rival cannot compete effectively for sufficient contracts, it may not be

able to reach efficient scale profitably within a reasonable time period.

55. As noted above, consideration should be given to how the duration relates

to other factors. Even an arrangement with a shorter term and without

penalities for termination may still foreclose if, as a matter of commercial

reality, the customer cannot practically change suppliers, or has little or no

incentive to switch. For example, exclusive arrangements of shorter

duration or where there is a right to terminate the arrangement on short

notice may lead to foreclosure if there are no adequate substitutes for the

dominant firm‘s product for a large part of demand in the relevant market,

or if customers have a strong incentive to continue carrying the product.

This could be the case if the product is a ―must stock‖ item.

Existence of Alternative Sources of Supply or Alternative Means of Access

to the Market

56. Another potentially relevant factor is the feasibility of competitors finding

or developing alternative sources of supply or alternative distribution

channels, including direct sales to customers.

57. For example, even if a supplier has long-term distribution arrangements

with a substantial portion of distributors in a relevant market, there may

not be significant foreclosure if competing suppliers can effectively

bypass distributors and offer their products to customers directly.

Analysis of this should compare the cost, ease and efficacy of distribution

through distributors versus direct distribution to determine if the latter is

comparably efficient and offers an effective substitute for the former. The

preferences of customers are also important. If many customers strongly

prefer to purchase through distributors, direct distribution may be

ineffective.

58. The ability of competitors to develop new sources of supply or distribution

outlets, or vertically integrate upstream or downstream, may also be


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relevant. Such alternative means could allow rivals to compete on a

comparably effective basis with the entity imposing the exclusive dealing

arrangements.

The level of the distribution chain at which there is exclusivity – e.g.,

suppliers vs. distributors vs. end users

59. Entry barriers and other market conditions may differ depending on the

level of trade. For instance, entry barriers at the wholesale level may often

be lower than at the retail level, which may make foreclosure at the

wholesale level less likely. Foreclosure of access to end users will

generally be more difficult to counter for competitors than foreclosure of

access to a particular distribution channel. Similarly, compared to final

consumers, buyers at an intermediate level may be more professional and

better able to guard themselves against a harmful loss of choice and

competition.

Whether the Customer Requested the Exclusivity

60. In general, the fact that a customer requested an exclusive arrangement

does not mean that an arrangement, taken cumulatively with other similar

arrangements in the relevant market, cannot foreclose rivals. However,

the fact that the customer requested the exclusive dealing arrangement

could inform other parts of the overall analysis. It may indicate that the

arrangement is in the customer‘s interest and contributes to increases in

efficiency in the relevant market. In addition, it may show that the firm

had no intent to use the arrangement to foreclose competitors, to the extent

that its intentions are relevant to the analysis. However, this consideration

is at best only suggestive and does not directly determine whether the

effect of the exclusivity is to weaken competitors and harm competition.

Ease of Entry and Market Dynamics

61. Analysis of the factors listed above should not be conducted in isolation,

but rather be carried out within the context of the economic considerations


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and dynamics of the relevant market. Relevant considerations in this

regard include entry barriers and ease of entry, rate of market growth (or

decline) and/or rate of innovation.

62. Long term exclusive arrangements covering a substantial portion of a

relevant market may still not harm competition in circumstances where

barriers to entry are low, demand is expanding, or innovation is rapid.

Under such circumstances, the foreclosure that occurs in the short run may

not create sustained harm to competition in the future, so a dynamic

analysis of the competitive effects may be necessary. The extent to which

the firm carrying out the exclusive dealing has substantial market power

may be important in considering whether foreclosure is likely to lead to

sustained harm to competition.

63. One analytical approach is to examine whether the exclusive arrangements

may have materially altered the likelihood or feasibility of entry, such as

whether, but for the exclusive dealing arrangements, an effective

competitor or group of competitors could have emerged within a

reasonably short period of time (e.g. 2 years) to challenge the dominant

firm‘s market power.

Scale Economies

64. Depending on the circumstances, denying a competitor access or partial

access to the market may prevent or hinder it from obtaining the

economies of scale necessary to allow it to grow into an effective

competitor. This may mean preventing it from obtaining the minimum

efficient scale necessary to be profitable, or simply from obtaining the

scale economies enjoyed by the incumbent, thereby making it difficult for

the rival to be competitive in the market. This in turn prevents the

competitor from growing and eroding the market power enjoyed by the

incumbent.


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65. Two slightly different but related factors that may be taken into

consideration when assessing if there has been foreclosure are the

existence of network effects and/or incumbency advantages. These factors

have an effect similar to scale economies since a dominant firm can use

exclusive deals to exploit such market dynamics in order to deprive a

competitor of the means of gaining the required critical mass of sales or

credibility with customers. One case where such dynamics were relevant

was that heard by the Canadian Competition Tribunal against A. C.

Nielsen, a provider of scanner data.11

Through signing staggered

exclusive contracts with retailers, the incumbent firm made it very

difficult for a rival to enter the market, since the entrant would have been

forced to sign up retailers one at a time. This caused a credibility problem

since retailers were reluctant to give their data to a company that had no

other major retail clients.

C. Evidence of competitive effects

66. Most exclusive dealing cases involve complainants and enforcement

agencies claiming consumer harm from exclusive dealing. Meanwhile

companies using such arrangements claim the exclusive dealing results in

efficiencies. Therefore, an important question is, ―what kind of evidence

can authorities and courts rely upon to establish the extent of competitive

harm from foreclosure?‖

67. Given that most investigations will involve the introduction of an

exclusive (or near exclusive) arrangement in a market, and that such

investigations typically are initiated at the request of a competitor and/or

customer who claims to have experienced harm as a result of the exclusive

arrangement, there may be a period of time during which the arrangement

has had an effect on the market. Investigators should attempt where

11 Reasons for Order in case CT 94/1, 1994, p.87.


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possible to determine if these effects are consistent with harm to

competition or suggest an efficiency. 12

68. Evidence of anticompetitive effects in exclusive dealing cases will

generally be similar to that used in other exclusionary abuse of dominance

cases. The most probative evidence is generally direct evidence, such as

historical evidence that overall output has decreased in the relevant market

or that prices have increased as a result of reduced competition. The most

convincing evidence is consistent with predictions based on a specific

theory of harm, where the predictions differ from those of a theory

claiming the exclusive arrangement promoted efficiency. For example, an

efficiency explanation typically predicts increased output and lower prices

relative to the counterfactual, while an anticompetitive explanation will

typically predict the opposite.

69. Evidence concerning the effects of the arrangements on the market

structure, such as evidence showing the exit of some or all competing

firms, raising the barriers to entry, or a reduction in the competitive

significance or market shares of existing competitors may also be

probative. Evidence that new entrants emerged or expanded and were able

to compete effectively by disciplining the price or output setting of the

dominant firm during the period of the alleged abuse can be a strong

indication that the exclusive arrangements did not foreclose competition or

have an anticompetitive effect. Indirect and circumstantial evidence, for

example, relating to market share fluctuations over time could also be

relevant. Finally, the agency or court may resort to qualitative and

quantitative studies (such as customer responses) and expert economic

testimony.

12 Even if the theory of harm involves a discrete occurrence such as that a competitor will

be driven from the market in the future, it is likely that such a competitor will have begun

to experience a reduction in profit, which would foreshadow its exit. Of course, such a

reduction by itself is not necessarily a proof of harm as such loss in profits could also

occur if the exclusive dealing were pursuant to some efficiency enhancing activity.


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70. This section first describes observable market outcomes that could directly

indicate harm to competition from an exclusive dealing arrangement and

then discusses ‖indirect‖ evidence that may show harm to competition.

(i) Increase in prices

71. Anticompetitive effects can involve increased prices associated with a

decrease in output. Below are specific examples of market observables

that could directly indicate harm to competition from an exclusive dealing

arrangement. It is important to bear in mind, however, that a comparison

that accurately accounts for all relevant variables is not always possible.

72. Higher prices charged by the dominant firm after the onset of foreclosure

(although not necessarily immediately) can constitute strong evidence of

harm to competition if not explainable by other supply and demand

factors. However, higher prices may also be explained by other factors

such as an increase in services provided by downstream resellers as a

result of the exclusivity that would cause end users to be willing to pay

more. Alternatively they may be explained by an increase in overall

market demand due to some independent factor such as a decrease in the

price of a complementary good, or a favorable change in consumer

preferences. It should also be kept in mind that many of the exclusive

dealing efficiency arguments directly or indirectly relate to improved

quality in the product‘s functionality or downstream service, which would

likely increase prices.

73. However, if the evidence does not support any other cause for a price

increase, this may suggest it results from harm to competition. As

described more fully below, changes in quantity can help determine the

nature of a price increase. A price increase accompanied by a quantity

increase, all else equal, is consistent with a procompetitive impact, while

an accompanying quantity decrease suggests an anticompetitive impact.


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74. If the exclusive dealing arrangement is employed in some geographic

markets and not others, evidence of harm to competition would be that the

dominant firm has higher prices in areas with the arrangement than in

those without the arrangement and that these differences are not

explainable by other supply or demand conditions, such as sellers

providing a higher level of service in the exclusive dealing geographies. If

demand conditions are different across areas, comparing price levels may

be misleading. However, larger price increases in the area in which

exclusive dealing was used relative to other areas might also provide

useful evidence of anticompetitive effects.

75. Comparing price levels across time periods or across geographies can

occasionally be a fairly straightforward process. Sometimes the parties‘

own internal analysis of pricing will indicate significant price differences.

However, the need to account for other factors that might affect prices

may require the work of an economic or industry expert. When looking at

prices before and after the institution of an exclusive arrangement one

must account for underlying changes in the market over time. For

example, in high tech industries where products can change as quickly as

every quarter, the effects from exclusivity must be disentangled from

effects of new product introductions and changes in consumer demand

over time, as well as changes in costs over time. When comparing prices

across areas one must be able to separate out differing supply and demand

characteristics in the different locations.

(ii) Reduction in Overall Output

76. A complementary analysis to analyzing price changes is analyzing

quantity changes. A reduction in the overall market output may suggest

that the exclusive arrangement has harmed competition, provided that it is

not explained by exogenous decreases in demand or increases in the prices

of inputs. Specifically, all else equal, it may be difficult to reconcile an

efficiency claim that exclusivity has improved services or quality with a

reduction in quantity. Thus, in the absence of other explanations it would


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be reasonable to infer that an exclusive arrangement was reducing

competition.

77. Evidence of output reductions may be obtainable from parties‘ ordinary

course of business documents regarding sales or production. For large

industries, third party or government sources may track industry

production or sales.

(iii) Increase in market share

78. After an exclusive dealing arrangement is implemented, an increase in a

dominant firm‘s market share that cannot be explained by a reduction in

the dominant firm‘s relative prices or by supply and demand factors such

as an increase in dominant firm‘s product‘s relative quality (due perhaps

to the exclusive arrangement) or change in consumer taste, can provide

evidence that the arrangement has an exclusionary effect. Market share

data can be constructed from parties‘ production and sales data in ordinary

course of business documents. For some large industries, third-party data

providers track sales and report market shares. Of course, it is essential to

consider the possibility that the dominant firm gained market share by

increasing the efficiency of its distribution system or creating incentives

for its distributors or retailers to work harder.

(iv) Exit

79. Exit by an existing competitor as a result of an exclusive dealing

arrangement also suggests an anticompetitive effect. Exit by a firm when

there are some costs to re-entering or some significant time lag means that

any competitive pressure that the firm would have exerted on the

dominant firm is gone while it is not in the market. The reduction in

competitive pressure may result in increased prices or decreased quality

for consumers. However, great care must be taken in attributing the exit

of an existing competitor (or failure to enter of a potential rival) to the

dominant firm‘s exclusive dealing arrangement. Inefficient rivals may


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exit as a result of their own shortcomings. In addition, an exclusive

dealing arrangement may precipitate exit by a rival because the

arrangement generates benefits to consumers. Therefore, determining if

the exit is an anticompetitive effect may require determining if overall

output in the market fell after exit and prices increased as a result of the

exit. Similarly, exit with no evidence of quality improvement in the

dominant firm‘s product or complementary services suggests that the exit

likely harmed end users.

(v) Deterring Entry

80. The focus of the types of evidence above is on the elimination of existing

competition. However, exclusive dealing can prevent entry by potential

competitors and thereby reduce the competitive constraint on the dominant

firm in that way.

81. Predicting whether a firm would have entered a market absent the

exclusive dealing arrangements is difficult. The best types of evidence

include finding that the firm had committed substantial resources to

developing and/or producing a product for entry, had committed resources

to the distribution of the new product, and has had success in the past or in

different geographic markets introducing similar products. For example,

evidence that a firm that had an ongoing and successful R&D programme

to develop a new product that was suspended after the introduction of

exclusive arrangements may suggest that entry was likely, although such

evidence would not be conclusive

82. A firm having entered into arrangements with distributors to carry a new

product would suggest entry was likely or at least expected in the normal

course of business. The likelihood would increase if the firm were already

making a similar product and selling it in different geographies, or if, for

example, the firm operated in a high tech industry that was characterized

by the introduction of new products on a regular basis and this firm

typically introduced new products consistent with the industry trends. The


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prospect of entry into the market should be timely, likely, and sufficient to

provide a competitive constraint on the dominant firm for some time

period but for the exclusive arrangement.

Other evidence of harm to competition

83. The timing of the introduction of an exclusive dealing arrangement can be

significant in determining its intended and likely effects. An exclusionary

motivation may be suggested when the arrangement seems to have been a

response to competitive inroads by existing competitors or the appearance

of new entry threats. However, exclusive dealing arrangements adopted

under such circumstances could also be reasonable responses to actual or

newly threatened free-riding on investments made by a dominant firm. As

a general matter, the importance of any one piece of evidence can be

determined only in the context of other evidence.

84. Documents created by the dominant firm in the ordinary course of

business that shed light on reasons for an exclusive arrangement and the

competitive situation can inform the assessment of the intended and likely

effects of the exclusive dealing arrangement.

85. Documents consistent with anticompetitive effect include those which

recognise an anticompetitive intent, those that are consistent with there

being no other reasons for the exclusivity other than to harm competition,

and those documents that recognise elements of the theory of harm.

86. The dominant firm‘s business documents may refer to a desire to prevent

entry or otherwise harm competition.13

For example documents created

by a dominant wholesaler indicating that the exclusive adoption of its

product by its largest retailers has stabilized prices in the wholesale or

retail market would be consistent with the exclusion causing harm.

Conversely, documents indicating that the inability to sign all major

13 This is different from the desire to harm rivals. Care should be taken when interpreting

such statements.


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customers to exclusive agreements has destablized prices may also

indicate harm to end users.

87. Alternatively the dominant firm‘s business documents may suggest that

the exclusive dealing arrangement could not be expected to produce net

benefits for it without weakening competition from its rivals. For

example, internal documents of the dominant supplier may indicate that

securing exclusivity would require substantial costs, e.g., compensating

distributors or retailers for foregone sales opportunities of competing

goods, but result in no (or insignificant) additional sales of the dominant

firm‘s goods in the short term. This may suggest that the arrangement

would make economic sense to the upstream party only if it weakened

competition in the dominant firm‘s market. That is, the most reasonable

inference from such facts may be that the dominant firm benefitted from

not having to lower its prices to compete with other sellers.

88. Other relevant documents that are consistent with the theory of harm can

include documents referring to one of the dominant firm‘s most important

strategic assets as its size or ―must have‖ status. They can also include

those of the target firm assessing its strength and the strength of its

competitors, or the importance of (certain) retailers for competitors,

strategy documents of distributors or retailers assessing the strength of the

products they sell and that determine which products to carry, and

independent comparative evaluations of products that recognize

competitors have a superior product.

89. It may raise concerns if a dominant supplier of a good add a requirement

to an existing contract with a downstream distributor that it not carry a

competing product, but makes no other changes to the terms of the

contract nor any other changes to the business relationship. It would be

difficult to argue that such exclusivity was promoting some efficiency


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since there are no new relationship specific investments.14

Similar

reasoning applies if a dominant firm agree with a downstream firm to

engage in joint development of a product to be sold in market A, only if a

set of downstream firms handled the dominant firm‘s products exclusively

in an unrelated market B. Again it is difficult to infer that the exclusive

arrangement supported some efficiency since markets A and B are not

related.

90. Complaints by distributors or retailers need to be considered carefully.

Firms will often complain that exclusivity arrangements take away profit

opportunities, but this is not evidence of competitive harm. The mere fact

that a firm complains about exclusivity does not mean it is

anticompetitive.

91. Distributors can benefit from both pro-competitive and anticompetitive

arrangements. It is therefore important to bear in mind that when

distributors favor exclusive dealing arrangements, the reason may be that

the arrangements are anticompetitive and the resulting additional profits

are shared among the parties to the arrangement.

Sources of relevant evidence

92. Documentary evidence may be obtained from the firm under investigation,

its customers and competitors. Each source may provide information that

is relevant to various aspects of the case, and particularly whether the

degree and nature of foreclosure is sufficient to harm competition. In

addition, testimonial evidence may be of similar value.

93. The firm under investigation may have documents such as business plans,

strategic plans, or marketing plans that may show the purposes and effects

14 It might be the case that a downstream firm began to free ride on an already existing

relationship specific investment and the exclusive is a way to stop such behavior. In this

case one would expect to see other evidence of the dominant firm trying to protect some

existing relationship specific investment. This would constitute an efficiency if the

exclusive arrangements were necessary for the dominant firm to continue such

investments into the future.


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of the exclusive dealing arrangement, including whether it has a legitimate

business justification or is motivated by a desire to foreclose competitors.

Similarly, the firm under investigation may have documents that it used to

persuade its customers to agree to an exclusive dealing arrangement, or

that explain the details of the arrangement to senior management.

94. Distributors and retailers may have documents relevant to their decision to

enter into the exclusive dealing arrangement. Similarly, these documents

may show any benefits they derive from the exclusive dealing

arrangement.

95. Competitors of the firm under investigation may also have documents that

shed light on the competitive effects of an exclusive dealing arrangement.

In particular, business planning documents as well as business records

regarding sales may help to establish the effects on individual competitors

from an exclusive dealing arrangement. For example, such documents

may help to determine whether the exclusive dealing deprives competitors

of scale economies to such a degree that competition may be harmed.

Conversely, these documents may help establish whether there are

adequate alternative sales channels for competitors to use.

96. Price data typically can be obtained from the selling parties. Such

information may be contained in business documents that track sales, sales

contract summaries, or strategic documents relating to pricing strategies.

For some products, third-party firms may keep track of industry data such

as sales levels and average price levels.

V. JUSTIFICATIONS AND DEFENCES

A. Introduction

97. When exclusive dealing appears to harm competition, parties to the

arrangement may raise justifications and defences to show that it also has


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positive competitive or economic effects, so that the conduct ought not be

condemned.

98. A number of potential efficiency benefits can result from exclusive

dealing. Some of the more common efficiency arguments raised as

defences for exclusive dealing include addressing problems of interbrand

free riding and investment hold-up problems by providing a better

alignment of incentives and more stable market conditions within which

manufacturers and retailers can make longer-term investments.

99. An agency should not necessarily refrain from considering possible

efficiencies until after a determination of plausible or likely

anticompetitive effects has been made. In many cases it will be

advantageous for the agency to consider possible efficiencies from the

outset. They may be relevant both for decisions on the prioritisation of

cases and also to how the agency formulates and thinks about its theory of

harm and the evidence needed to support it.

B. Potential efficiencies

Encouraging dealers to promote a manufacturer's products more

vigorously

100. Most justifications of exclusive dealing turn, at least in part, on the theory

that such arrangements effectively align the interests of suppliers with

their distributors. One way in which this may be useful is where a

supplier wants to rely on a distributor to promote its product to customers.

While the supplier will have the incentive to promote the specific benefits

of its product relative to the alternatives available, a distributor that sells

multiple competing products may be relatively indifferent as to whether a

customer chooses that specific supplier‘s product or a competing product.

Alternatively it may wish to promote the product on which it earns the

highest margin. A supplier may therefore legitimately wish to align the


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interests of the distributor with its own in order to ensure its product is

sufficiently promoted by the distributor.

101. This alignment of interests can be achieved, at least theoretically, by a

detailed contract, specifying for example types of promotion, advertising

rules or display requirements, necessary investment in marketing and

personnel, hours of operation and required dedication of effort to the

brand. However, contracts of this sort (rather than a simple contract of

exclusivity) can be expensive to administer and monitor and may still be

incomplete and imperfect.

102. By making the relationship exclusive, it may be possible to better ensure

that the distributor‘s interest is aligned with that of the manufacturer. The

exclusivity effectively creates the incentive for the distributor to be more

―loyal‖ to the supplier and the brand, and to commit its resources to the

promotion of the specific brand. As a result, in some circumstances it

could result in more effective interbrand competition between suppliers of

competing products than would occur if each distributor represented a

number of suppliers.

Encouraging suppliers to help distributors by providing services or

information benefiting consumers

103. A related potential efficiency is that exclusive dealing can provide

incentives for suppliers to assist distributors. If assistance provided by the

supplier will benefit not only sales of its own product, but sales of

competing products, incentives to assist will be minimized, but if the

improvements will only benefit the supplier, then the willingness of the

suppliers to assist distributors will be greater.

104. This assistance can take many forms depending on the product in question.

It can involve financial support by way of equity investments, loans, loan

guarantees or similar types of financial support. It can involve transfer of

expertise through product or sales training. It can involve the loan of


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personnel to assist the distributor. It can involve efficient joint promotion,

marketing or advertising between the supplier and its various distributors.

105. These types of assistance may represent an efficient way to balance the

marketing of the product between the supplier and distributor. For

example, the supplier may be able to access capital at lower cost than the

distributor. The supplier may have greater technical expertise with respect

to the product that it can share with the distributor. It may also have the

ability to advertise its goods more efficiently. However, without the

alignment of interests created by the exclusive dealing arrangement it may

be more difficult to take advantage of these opportunities.

Addressing problems of free-riding between suppliers

106. Exclusive dealing can also reduce the risk of free riding by one supplier on

the efforts of another supplier. Free-riding between suppliers can occur

where investment by suppliers at a distributor‘s premises may also attract

customers for its competitors. For example, one supplier‘s product may

bring customers into the distributor because it was vigorously advertised

through the effort of the supplier. If at this point the distributor can then

sell a competing supplier‘s product, on which it makes more profit, the

manufacturer‘s willingness to invest may be undermined.

Addressing “hold-up” problems for customer-specific investments

107. Sometimes a supplier may need to make investments, for example in

special equipment or training, in order to supply particular customers.

Where such investments need to be relationship-specific, such that the

supplier cannot then use it to supply other customers, it may not want to

commit the necessary investments before it is sure that the customer will

commit to purchase solely from that supplier, or to purchase a certain

quantity. In some circumstances an exclusive dealing arrangement may be

necessary to provide the supplier with the required level of certainty

needed to make the investment.


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Allowing suppliers to control distribution quality more easily

108. Exclusive dealing has the potential to improve the supplier‘s ability to

improve the quality of distribution in several ways. Firstly, if it reduces

the number of distributors that the supplier has to deal with, it may make it

easier for suppliers to monitor distributors. If each distributor deals with

multiple products, each supplier has to incur costs to monitor the

distributor in its representation of their product.

109. Secondly, if the distributor is exclusive, then the nature of the distributor‘s

offering, such as the shop set-up, branding and presentation can be tailored

to a particular supplier‘s product, so as to make it a more attractive

offering to the public.

110. Thirdly, as discussed above, exclusive dealing can increase the

distributor‘s incentives to promote a particular supplier‘s product. As a

result, the supplier‘s need to monitor and police the distributor may be

reduced.

111. In some circumstances, exclusive arrangements may also reduce, to at

least some degree, the uncertainty from fluctuations in demand. This may

be of particular benefit for products for which production and supply

planning is important. Where distributors are committed exclusively to

single suppliers, suppliers may have a stronger incentive to ensure that

each distributor gets sufficient supply even in times of potential shortage.

This incentive may be reduced if the distributor were also to sell

competing products, as the supplier would face more uncertainty that its

products (rather than competing products) would be sold. A related point

is that an exclusive dealing arrangement may allow distributors to shift

some of the risk of unexpected changes in demand to suppliers, by making

it more attractive for the supplier to take on that risk.

C. Assessing Efficiencies


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Are the parties able to achieve the efficiencies through less restrictive

means?

112. Where a challenged exclusive dealing arrangement is defended by the

parties on the basis that it gives rise to efficiencies, it is necessary to

examine whether those efficiencies are related to the exclusive

arrangement, and if there are other ways to achieve the efficiencies

through less restrictive means. For example, a typical question would be

whether efficiencies claimed as a result of the exclusive dealing

arrangement might be achieved as effectively by a contract specifying

quantities or by other contractual terms that did not require exclusivity.

Are there other ways to effectively align the incentives which are assumed

to be important? Are there other ways to deal with the risks of free riding?

113. The question of whether or not the efficiencies could be achieved in a less

restrictive way is factually difficult. As a practical matter this issue will

typically arise after the fact, when some challenger (whether an agency or

private plaintiff) is suggesting that the arrangement is anticompetitive and

is proposing a variety of possibly less restrictive approaches to achieve the

goal. Care should be taken not to necessarily accept the effectiveness of

these assertedly less restrictive approaches at face value. Similarly, care

needs to be taken in assessing the efficiency justifications advanced by the

contracting parties. Agencies need to be careful not to assume any

justification offered is presumptively correct.

114. If it appears, upon careful examination, that there are obvious and

significantly less restrictive alternatives than the exclusive dealing

arrangement chosen, that may suggest that the efficiency justifications

proposed are, at least to some degree, a pretext for an anticompetitive

objective. On the other hand, if the procompetitive explanations for those

restrictions seem plausible, or it is difficult to assess which alternative is

less restrictive or more likely to give rise to the benefits, careful analysis

may be required before second guessing a business decision that has

already been taken.


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Balancing efficiencies against competitive harm

115. Assuming that there are both anticompetitive effects and legitimate

efficiencies created by the exclusive dealing or single branding

arrangement, the question is, what does one then do? How does one

decide the case?

116. The exclusive arrangements may, for instance, give rise to efficiencies in

product promotion and marketing, as contemplated above, which it is

reasonable to conclude would be difficult to replicate by detailed,

prescriptive contractual provisions. Or, there may be a genuine danger of

competing brands free riding on the product promotion efforts of the

dominant supplier, absent an exclusive dealing arrangement. On the other

hand, the exclusivity provision may also create serious difficulties for

alternate suppliers to reach consumers. How should agencies take account

of these competing effects of the conduct?

117. It is not right, at least as a matter of policy, that any efficiency, however

minimal, outweighs any anticompetitive consequence, however large.15

At the same time, the ability to accurately determine both anticompetitive

harm and procompetitive efficiencies, let alone precisely calibrate them

one against the other to determine which is larger is, as a practical matter,

extremely difficult.

118. The general approach taken, at least in theory (since as a practical matter

cases seldom arise where both significant competitive harm and

efficiencies are expressly recognized) is to develop a sense of the

importance of both types of effects (efficiency enhancing and

anticompetitive). As noted above, while quantification is rarely done in

practice, it may be possible to develop some appreciation for the relative

magnitude of the efficiencies and of the anticompetitive effects. When the

15 ICN Report on Exclusive Dealing, supra note 7 at 19 (twelve of the responding agencies

said efficiencies are balanced against anticompetitive effects; however, two countries,

Turkey and New Zealand, indicated that efficiencies may not have to be balanced against

competitive harms, see ibid).


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harm is likely materially greater than the efficiency, the practice tends to

be condemned. When the efficiency is likely materially greater than the

harm, the practice is not likely to be condemned. Where the harm and the

efficiency both seem likely to be at the same level of magnitude, a general

principle of non-interference in the market place may suggest that the

practice not be condemned.16

Alternatively, a presumption in favour of

enhancing short-run rivalrous competition may suggest a different

outcome in close cases.

119. In considering efficiencies and competitive harm from exclusive dealing,

the agency should determine whether the efficiencies created, even if

genuine, are likely to accrue only to the dominant firm, or are likely to be

passed on to consumers. Whether this is relevant to an assessment of an

efficiency ‗defence‘ to exclusive dealing may turn on the particular

competition regime in place in a particular jurisdiction. Most jurisdictions

apply a consumer welfare standard and thus require that consumers overall

benefit from the arrangement.

16 ICN Report on Exclusive Dealing, supra note 7 at 3 (many jurisdictions require objective

justifications or defenses to outweigh the anti-competitive effects; others only require the

negative impact be proportionate to the claimed justifications).